Post on 21-Apr-2018
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CHAPTER 11DISPUTES AVOIDANCE, RESOLUTION, AND ALTERNATIVE DISPUTE
RESOLUTION
David W. Halligan, PhD, P.E.1
Navigant Consulting, Inc.
James G. Zack, Jr., CCM, CFCC, FAACE, FRICS, PMP2
Navigant Consulting, Inc.
Adam K. BultBrownstein Hyatt Farber Schreck, LLP3
Jonathan Pray4
Brownstein Hyatt Farber Schreck, LLP
11-1. INTRODUCTION5
Construction industry disputes are common and the amounts in dispute are
frequently quite high. Additionally, disputes in the construction industry are
often quite complex, thus making it difficult to present issues clearly to non--
technical triers of fact. Until the late 1980s, the traditional dispute resolution
process involved negotiation and some form of administrative appeal, possibly
mediation, followed by either arbitration or litigation. As a result, the construction
industry has developed a number alternative means of resolving disputes.
Alternative dispute resolution (“ADR”) has become common in construction. 6
With parallel pioneering efforts of various public agencies and construction trade
associations, numerous ADR techniques have been have been developed and
implemented, all with the end goal of resolving disputes without resorting to the
traditional, time-consuming and expensive litigation. This chapter identifies and
discusses, in a summary manner, nearly thirty forms of ADR that are being used
in the construction industry. Some are merely variations of a theme, but all are
1 Associate Director, Navigant Consulting, Inc., San Francisco, California.2 Executive Director, Navigant Construction Forum™, Boulder, Colorado.3 Shareholder, Brownstein Hyatt Farber Schreck, LLP, Las Vegas, Nevada.4 Shareholder, Brownstein Hyatt Farber Schreck, LLP, Denver, Colorado.5
Portions of this chapter are reprinted with permission from Construction Contract Claims, Changes
& Dispute Resolution, 2nd Edition, Paul Levin, ASCE Press, Reston, VA, 1998.6 See An Overview of Alternative Dispute Resolution Use in the Construction Industry, Matthew P.
Tucker, The University of Texas at Austin, August 2005.
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different, and all have advantages and disadvantages that should be considered
prior to selection. The various forms of ADR are presented in what the authors
believe is a logical order following a dispute from the project site to the
adjudicative forum.
11-2. PRE-DISPUTE ADR METHODS
There are a number of ADR methods that can be put in place during the planning
and pre-construction phases of the project. In addition to minimizing and avoiding
disputes by practicing sound contract administration, discussed in earlier chapters,
contractors and owners alike can now take advantage of new practices developed
within the construction industry in recent years. Several programs and concepts
have evolved to resolve claims on a relatively informal basis through early
cooperative intervention. These programs include:
Escrow bid documents
Delegation of authority
Dispute resolution ladder
Geotechnical design summary reports
Partnering
Although somewhat interdependent, these programs and concepts can be applied
independently to improve cooperative construction efforts and dispute resolution.
11-2A. ESCROW BID DOCUMENTS
Escrow Bid Documents (“EBD”) is a form of ADR in that it provides for resolution
of some disputes quickly and at low cost. It is not a new process, having been
recommended to the industry in the early 1990s.7 The EBD process requires
that the apparent low bidder provides all worksheets, backup and all other
documents relied upon in preparing their bid to the owner shortly after bid opening
(typically within 24 to 48 hours) as a condition precedent to contract award. The
document package is jointly reviewed by the owner and the bidder. The owner’s
review is to determine that all documents submitted are readable. The contractor’s
review, on the other hand, is to ascertain that everything relied upon during bidding
7 See Avoiding and Resolving Contract Disputes During Construction: Successful Practices and
Guidelines, American Society of Civil Engineers, New York, 1991.
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is actually contained in the document package as the typical EBD clause in the
contract states that any bidding document not included in the EBD package shall not
be used or relied upon in any claim or dispute related to the project. The EBD are
not be used for pre-award evaluation of the contractor’s methods or to assess the
contractor’s qualifications. The information contained therein is considered a trade
secret and its confidentiality is to be protected as such. The EBD are returned to the
contractor, uncopied, at the end of the project as they are and remain at all times the
contractor’s property.
Once the contract is awarded, the documents are escrowed with a neutral third party
(a local bank or trust agent) for safekeeping. An escrow agreement is put in place
concerning who can access such documents; the privacy and confidentiality of the
documents; who pays for the storage of the documents; etc. The EBD are only
referred to and examined in the event t h a t s u c h d o c u m e n t s w o u l d a s s i s t
i n p r i c i n g a c h a n g e o r d e r o r a disputed issue involves how an item was bid;
what interpretation was relied upon during bidding; what productivity
factors were used in preparing the bid; etc. In this way, critical project
documentation is preserved in the safekeeping of a neutral third party and
referred to when such documents will aid the parties in resolving particular issues
in dispute.
The advantages of EBD are that bidding documentation, which may help resolve
issues, is captured, secured safely and available for use in the event of a
dispute at a relatively low cost. Further, it is perceived that the mere existence of
such EBD may he lp prevent spurious claims from arising on the basis of "I bid
it this way and your way will cost more". Any time such a statement is made, the
party receiving the statement is within their rights to request immediate access to
the EBD to confirm the statement.
Potential disadvantages of the EBD system include administrative disputes on the
organization, readability and structure of bid documents. Additionally, no matter
how secure the escrow process is, inadvertent and unwarranted exposure of the
contractor’s proprietary material may also be a risk.
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11-2B. DELEGATION OF AUTHORITY
Experience teaches that the longer it takes to finalize negotiations of a disputed issue
and sign a settlement agreement, the more likely the dispute will escalate, become
more expensive and thus harder to resolve. One practical method of avoiding
disputes is for the owner to delegate a certain level of change order and claims
settlement authority to the project manager level. If smaller, discrete issues can be
analyzed, negotiated, settled and a change order or claims settlement document
executed quickly and on site, then there is less likelihood that unresolved changes
and issues will grow into a larger dispute. The key to this form of early dispute
resolution is to establish a meaningful delegated amount that a large tranche of
issues can be handled on site and not have upper management become a bottleneck
that causes unresolved issues to accumulate.
11-2C. DISPUTE RESOLUTION LADDER
Another practical method of avoiding unresolved disputes is for the owner and the
contractor to establish a formal, written dispute resolution ladder. This is a parallel
organizational chart showing the owner and contractor counterparts (i.e., Assistant
Project Managers, Project Managers, Project Executives, etc.) along with specific
timeframes each level has to resolve issues. For example, if the Project Managers
have 30 days to resolve an issue and it remains unresolved, on day 31 the issue is
automatically elevated to the next level. The concept is simple – assign issues to
specific individuals by name and give them a set timeframe. If numerous issues
continue to be elevated for lack of resolution at the lower levels, it is likely that
management on both sides will find a way to resolve this difficulty.
11-2D. GEOTECHNICAL DESIGN SUMMARY REPORT
This concept, originally proposed in the 1970’s for use in tunneling construction
projects8, has slowly been spreading to other types of construction. This is the
Geotechnical Design Summary Report (“GDSR”) or the Geotechnical Baseline Report
(“GBR”). An essential part of underground construction projects, the GBR goes
further than traditional site investigation report, boring logs and soils report. The
GBR sets forth the designer’s interpretations of subsurface conditions and their
8 See Recommended Procedures for Settlement of Underground Construction Disputes, U.S. National
Committee on Tunneling Technology, Washington, D.C., 1977.
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impact on design and construction. Contracts employing this ADR mechanism also
typically state that the contractor has a right to rely upon the interpretations set forth
in the GBR.
The GBR provides a definable baseline of subsurface conditions for determining
whether actual conditions encountered are materially different or not. It removes the
uncertainty of how the subsurface conditions should be interpreted and what could
be expected by a reasonably prudent contractor. Along with the designer’s
description and interpretation of anticipated subsurface conditions, the anticipated
behavior of the ground consistent with the specified or most likely used construction
methods is also described. Such factors as slope stability, dewatering methods,
pumping quantity estimates, well spacing, and so forth should be engineered and
provided as part of the GBR.9
The GBR has enjoyed significant success on numerous tunneling projects in reducing
differing site condition claims and/or resolution at the project level. Its success rate is
founded on eliminating the uncertainties surrounding a mere presentation of a
subsurface survey or boring logs, with the owner taking a more proactive
responsibility for the thoroughness of the conditions and the interpretation of the
conditions by engineers and designers.
11-2E. PARTNERING
11-2E.1. Partnering Defined
Partnering, quite simply, is the establishment of a team approach for mutually
beneficial resolution of the ongoing difficulties and problems that typically arise on a
construction project. The Associated General Contractors of America (“AGCA”)
characterize the partnering process as “attempts to establish working relationships
among the parties through a mutually developed formal strategy of commitment
and communications. It attempts to create an environment where trust and
teamwork prevent disputes, foster a cooperative bond to everyone’s benefit, and
9 Randall J. Essex, Geotechnical Baseline Reports for Construction: Suggested Guidelines, Technical
committee on Geotechnical Reports of the Underground Technology Research Council, American
Society of Civil Engineers, New York, 2007. See also, Guidelines for Preparing Geotechnical Design
Reports, California Department of Transportation, Division of Engineering Services, Geotechnical
Services, Sacramento, CA, December 2006.
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facilitate the completion of a successful project.”10 A more useful way of looking at
partnering is to see it as a way for the owner, design professional, construction
manager and contractor to maintain regular communication and discuss and
implement cooperative efforts. It provides an alternative to the adversarial pattern
that often exists where each party crafts all communication and correspondence in
ways to establish and protects one’s own position to the exclusion of all others.
Partnering is a voluntary process and primarily consists of workshops, meetings,
and the use of facilitators to help the parties establish working relationships where
project problems can be discussed and resolved in a nonadversarial atmosphere.
11-2E.2. History of Partnering
Partnering’s roots in public construction began in 1988 with the efforts of Larry
Bodine, Commander of the Mobile (Ala.) District of the U.S. Army Corps of
Engineers11, later named the director of the Arizona Department of Transportation
(ADOT). Since then, partnering has been successfully implemented to varying
degrees by the Corps and other State and Federal agencies, most notably by a large
number of State Departments of Transportation (“DOT”). Many State DOTs have
implemented the partnering process on an agency-wide basis and are frequently
cited in articles and case studies in the construction trade press.
11-2E.3. Elements of Success
The basic elements of partnering include principles and procedures designed to
bring together the different layers of management to work together as a team. The
elements include the following activities and concepts, which lend structure to the
partnering process:
• The preconstruction workshop is a one or two day meeting between
key management and jobsite personnel representing the owner,
contractor, design professional, construction manager, major
subcontractors and suppliers, and other key stakeholders, such as local
agencies or community groups. The primary objectives of the initial
10 Partnering - A Concept for Success, Associated General Contractors of America, Washington, D.C.,
September, 1991.11 Charles R. Glagola and William M. Sheedy, Partnering on Defense Contracts, Journal of Construction
Engineering and Management, Vol. 128, No.2, American Society of Civil Engineers, April 1, 2002.
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workshop are to (1) build teams to work with different issues that are
expected during the project; and (2) to develop a project charter.
• The project charter is a document to be signed by all at the end of the
workshop that defines the goals and objectives of the partnering effort.
These goals are more than simply to complete the project on schedule
and budget. They comprise specific and measurable tasks, such as no
lost-time accidents, good community relationships and development of
efficient construction procedures to solve major job challenges and
avoid disputes.
• The commitment of top management is essential to the success of
partnering. Top management of all the parties has to believe in the
concept and stand behind commitments it has delegated or
empowered to the field staff to resolve jobsite issues. Since partnering
is a cultural change for most owners and contractors, top management
must remain heavily and continuously involved in the partnering
process throughout the life of the project.
• Empowerment is the delegation of authority and responsibility to the
lowest possible levels in an organization. This allows various team
members to meet, discuss and resolve problems in a timely and
efficient manner. The partnering process provides noncontentious
procedures for escalating issues to higher levels in the event the parties
cannot reach agreements within certain timeframes.
• Partnership maintenance, comprised of routine, ongoing partnering
meetings (usually monthly but no less frequently than quarterly),
follow-up workshops, close out workshops and end of job rewards and
recognition, are essential for keeping the partnership on task and
properly evaluating its effectiveness.
These elements, properly implemented and practiced, have proven to foster less
adversarial construction projects with more timely completion, reduced costs, and
less claims. One study of some 280 projects indicated “…that partnered projects
achieved superior results in controlling costs, the technical performance and in
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satisfying customers compared with those projects managed in an adversarial,
guarded adversarial and even informal partnering manner.”12
11-2E.4. Obstacles to Partnering
It seems counterintuitive that the parties to a construction contract, with such
diverse interests, can work together in a team atmosphere. If one looks at past
history and the nature of construction, it is easy to see why. Perhaps a review of
these obstacles to partnering will allow one to more reasonably assess the tradeoffs
and benefits of partnering.
11-2E.4.a. Culture of construction. Most obstacles to partnering lie in the
history and nature of the construction process. Construction has been
traditionally characterized as the realm of rough and tumble individuals
using raw nerve, brute force and commanding presence to move earth, steel
and concrete to build the subways, dams and skyscrapers of the world. To
some of these highly independent individuals, who travel the world to
construct projects under which they have full control, participating in group
partnering activities is both foreign and incongruous.
11-2E.4.b. Past dealings and nature of the parties. The three main parties
to a construction contract—owner, designer professional and contractor—
represent completely diverse entities, each with their own role and
personality.
The owner is the provider of the project, the source of funds and typically the most
passive and removed party involved in the process. The owner has an established
budget, a contractual project completion date and wants an end product meeting
their exact needs. Owners are frequently not interested in the details of the project
and often inexperienced with the complexity and risks of the construction process.
The owner neither wants to be involved in day to day problems nor wants to spend
extra money. The owner wants the end product on time, within budget and in
conformance with the plans and specifications.
12 Erik Larson, Project Partnering: Results of Study of 280 Construction Projects, Journal of Management in
Engineering, American Society of Civil Engineers, Vol. 11, No. 2, March 1, 1995.
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The design professional is the architect or engineer responsible for designing the
project and putting together the plans and specifications for its successful execution.
The designer typically works under a negotiated fixed fee or cost plus contract and
works under typical white collar office conditions in a controlled environment.
The contractor is the party responsible for executing the plans and specifications in
order to build the project. Construction is often seasonal, and within seasons, deals
with varying degrees of daylight hours, diverse weather conditions and
unpredictable factors such as unexpected site conditions and external economic
conditions. Contractors frequently must travel to where the work is, work with
unknown local manpower and resources and deal with unknown local utilities and
regulatory agencies. Construction is often fast paced, time is of the essence and the
contractor prefers to be at the jobsite building the project. Under these constraints,
contractor employees often work long hours under demanding conditions. Both
companies and their employees undertake this extra work and risk in return for
larger financial rewards and the enhanced satisfaction of successful job completion.
It’s easy to see how the ideological differences among the parties, along with the
potential for coordination conflicts in both scheduling and participation levels, can
make it difficult to implement partnering efforts. Nevertheless, once employed,
partnering efforts can help overcome these difficulties and provide multiple benefits
to the construction project and all stakeholders.
11-2E.5. Results of Partnering
Studies conducted by the successful participants in numerous partnered projects
have consistently cited favorable tangible results.
An increase in projects completed on or ahead of schedule;
Improved contract administration procedures;
A reduction in claims;
A reduction in owner’s engineering and administrative expenses (often 5% to
15% or more); and
Increased value engineering.
Partnering can create a sense of teamwork and result in a productive use of time.
The energies and creative efforts of the parties are better used in value engineering
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and mutually beneficial schedule improvements rather than writing letters and
being involved in contentious claims endeavors. For both the owner and the
contractor, the necessity of employees having to divert energies from new and future
projects in order to return to old projects for claims preparation, depositions,
litigation support and trials is extremely disruptive, draining and counterproductive.
To learn more about the details of partnering efforts, Partnering for Success, by
Thomas R. Warne, is strongly recommended. 13 Also check with major trade
associations, such as Associated Builders and Contractors and the AGCA, as well as
the Construction Industry Institute for other publications on partnering.
11.3. INITIAL CLAIMS AND DISPUTE PHASE
Once the contract is awarded and Notice to Proceed issued, the contractor will start
work in the field. Disagreements over potential change orders and claims14 are
inevitable given the complexity of today’s construction projects. However, there are
a number of ADR methods that can be implemented on the project to avoid disputes.
Among them are the following.
11-3A. INITIAL DECISION MAKER / SINGLE DISPUTE RESOLVER
To provide for prompt review of claims submitted by the contractor and guarantee a
decision within a reasonable period of time the American Institute of Architects
(“AIA”) General Conditions of the Contract for Construction provides for an Initial
Decision Maker (“IDM”).15 Similarly, the American Arbitration Association (“AAA”)
recommends consideration of a Single Dispute Resolver for smaller and less complex
projects.16 Contractor claims are to be submitted to the IDM, who has 30 days to
render a written decision. Upon receipt of the IDM’s written decision or the passage
of 30 days without such a decision, the owner and the contractor may refer the
13 Thomas R. Warne, Partnering for Success, American Society of Civil Engineers, New York, 1994.14 The term “claim” is defined for the purposes of this chapter as a written statement from one of the
contracting parties requesting additional time and/or money for acts or omissions under the terms of
the contract for which proper notice has been provided; the claimant can demonstrate entitlement
under the contract; and is able to document both causation and resulting damages. 15 See Article 15.2.1 of A201-2007 and Article 3.3.1.11 of AIA B201-2007. See also, Jeffrey L. Alitz and
Ben N. Dunlap, The New AIA and ConsensusDOCS: Beware of the Differences – The Professional Services
Agreements, Schinnerer’s 47th Annual Meeting of Invited Attorneys, 2008.16 See The Construction Industry’s Guide to Dispute Avoidance and Resolution, American Arbitration
Association, New York, 2004.
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matter to mediation. While it is likely that the owner will appoint the architect as the
IDM, the owner is free to name anyone it chooses in the contract. The article,
however, does provide that if no individual is named as the IDM in the contract, the
architect will assume the role of the IDM by default. The concept is to make certain
that a designated individual reviews and rules on a claim within a reasonable period
of time and either help resolve the claim or move the claim forward to mediation.
11-3B. STANDING OR PROJECT NEUTRAL / ON SITE NEUTRAL
ConsensusDocs 20017, Standard Agreement and General Conditions Between Owner
and Constructor, Article 12 and ConsensusDocs 240, Agreement Between Owner
and Design Professional Article 9.3.1 both set forth an “optional dispute mitigation
procedure” as an alternative to mediation. The owner employing this form of
contract document has the option of selecting an optional dispute mitigation
procedure – either a Standing or Project Neutral18 or a Dispute Resolution Board in
lieu of mediation. The use of the Neutral is not mandatory and the owner or
contractor may elect to bypass this and proceed directly to the more formal dispute
resolution procedure outlined in the contract.19 However, it is perceived that owners
who check the Project Neutral box do so in hopes that a neutral individual,
reviewing an issue professionally and objectively, will be able to guide the parties to
an acceptable resolution. Thus, it is unlikely that owners who opt for the Neutral
will routinely bypass this form of ADR.
11-3C. EARLY NEUTRAL EVALUATION
In this form of ADR when a dispute arises and the project level staff cannot resolve
the issue, an impartial third party (either jointly selected by the parties or appointed
by an external organization such as the AAA) is brought on site to listen to
presentations from both sides and evaluate how the dispute might turn out should it
be taken to Court. The concept is that the parties learn early on during the dispute
how strong their cases actually are in the eyes of a neutral. Additionally, this early
evaluation should help educate both parties on the efficacy of taking the dispute to
Court. Further, the neutral’s evaluation may point the way toward a negotiated
17 Published by The ConsensusDocs Coalition, Arlington, Virginia, 2011 edition.18 Ibid. The American Arbitration Association refers to this AR Form as an On Site Neutral. 19 Kurt Dettman, Suzanne Harness and John Carpenter, Project Neutrals to the Rescue! A New Tool for
Avoiding and Resolving Disputes on Construction Projects, Under Construction, Vol. 13, No. 3, August
2010, American Bar Association Forum on the Construction Industry.
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settlement both parties can live with. The advantage to the system is that both
parties gain insight into their positions concerning the dispute quickly and at a very
low cost. There appears to be no disadvantage to this form of ADR.
11-3D. OWNER/AGENCY REVIEW BOARD
Some public owners, particularly those with larger, long duration construction
programs, have established their own in-house Review Boards to hear disputes that
cannot be resolved at the project level. Such Review Boards are typically made up
of very senior employees ( or retired senior employees) of the owner's staff.
They are empaneled to review disputed issues in-house in an effort to resolve such
disputes, especially those caused by personality conflicts or misinterpretation of
contract requirements by the owner's staff. Such Review Boards are normally
structured to handle appeals of lower level project decisions in a simple, informal
manner. Typically they act promptly upon the contractor's request although some
have been known to have extremely complex requirements and can be very slow
to act.20 The apparent advantages o f Owner Review Boards are the ease of
obtaining an appellate hearing on an adverse decision at the project level and the
low cost involved with such a hearing. The most commonly cited disadvantages
include the perceived lack of impartiality as the Review Board members are
generally employees of the owner (thus creating an apparent conflict of interest);
the lack of due process; the lack of timeliness (in some cases); and the difficulty of
obtaining judicial review of the findings of such Review Boards.
11-3E. DISPUTE RESOLUTION BOARDS
11-3E.1. Dispute Resolution Boards Defined
Dispute Resolution Boards (“DRB”) – previously known as Dispute Review Boards –
are often referred to as the least intrusive and most effective ADR procedure for
reducing claims as well as providing a timely procedure to resolve claims quickly.21
20 Lowell J. Notebloom, Owner Controlled Dispute Resolution, 15th Annual Construction
Superconference, San Francisco, California, December 1996.21 As discussed in this chapter, this statement can be said to apply at least to heavy and highway
construction, but is not universally accepted. A 1996 AGCA survey found “perceived effectiveness”
of various ADR procedures to be led by partnering, followed by mediation, early neutral evaluation
(Standing or Project Neutral), binding arbitration, non-binding arbitration, and DRB’s, in that order.
Constructor, AGCA, Washington, D.C., January 1997.
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A DRB is typically comprised of three members; the first selected by the contractor
subject to veto by the owner; the second selected by the owner and subject to the
contractor’s veto; and the third (usually the Chairman) selected by the first two
members and subject to veto by both the owner and the contractor. The DRB is
established at the outset of the project; is provided sets of drawings, contract
documents and other related project documents; and meets routinely at the site
(monthly on larger projects and quarterly on smaller jobs) to monitor the progress of
construction. Whenever an issue arises on a project that cannot be resolved through
direct negotiations, either the owner or the contractor can refer the disputed issue to
the DRB. The DRB will hold a hearing within a short period of time after the issue
has been referred to them and render a recommendation concerning the issue in
dispute. Unlike other forms of ADR, DRB hearings typically deal with only a single
issue. DRB members are most often very familiar with the type of construction
involved, are respected in the industry and approach their responsibilities with
neutrality and impartiality.22
DRBs were first recommended to the construction industry in 1974 by the U.S.
National Committee on Tunneling Technology. 23 The DRB process was first
employed in 1975 during the construction of the second bore of the Eisenhower
Tunnel in Colorado. This first DRB heard and successfully resolved three disputed
issues to the satisfaction of the parties. The DRB process has now spread to a wide
variety of owner and project. At the present time, at least 14 State highway
departments, 12 or more major public transit authorities, dozens of cities and
counties throughout the United States, a number of Federal agencies and numerous
universities routinely use this form of ADR in their contracts.24 Internationally this
form of ADR is also gaining in popularity and use, as discussed further below.
11-3E.2. DRB Procedures
The DRB Board members are usually selected at the outset of a project; visit the
jobsite on a periodic basis; meet with project personnel from both sides; and keep
22 Robert M. Matyas, A.A. Matthews, Robert J. Smith and P.E. Sperry, Construction Dispute Review
Board Manual, McGraw Hill, New York, 1996.23 Better Contracting for Underground Construction, U.S. National Committee on Tunneling
Technology, Standing subcommittee No. 4 – Contracting Practices, U.S. Department of Transportation,
Urban Mass Transit Administration, Washington, D.C., 1974.24 Practices and Procedures: Dispute Review Boards, Dispute Resolution Boards, Dispute
Adjudication Boards, The Dispute Resolution Board Foundation, Seattle, Washington, 2007.
14
current with job activities and developments through progress reports and relevant
documentation; and are available to meet and hear disputes on an as needed, as
requested basis. The prior industry experience of the DRB members and their
contemporaneous familiarity with the project puts the DRB in the unique position of
being able to make quick, informed and reasonable recommendations to resolve
disputes at early stages.
The DRB generally holds its first meeting as soon as possible after the work begins to
establish the groundrules and operating procedures for the project. The frequency of
subsequent visits depends on activity levels at the jobsite, but one meeting every
month on large, complex and/or contentious project or every three to four months
for smaller, less contentious jobs appears to be the norm during the more active
phases of the project. In addition to routine visits, special, private meetings and
hearings are held at locations selected by the DRB itself with the agreement of the
parties.
As soon as a dispute becomes unresolvable at the job level, and upon request of
either party, the DRB arranges a hearing. Position papers are provided to the DRB
(and the other party) by each party, accompanied by all supporting documentation.
At times, the parties may agree to jointly prepare the supporting documentation
binder(s). The DRB hearing is typically held at or near the jobsite and is relatively
informal. Witnesses, experts and other resources that might provide the DRB with
information helpful to the DRB in making a decision can be used in the hearings. It is
noted that either party can request a DRB hearing at any time. Typically
presentations are made by the project participants and there is no involvement of
attorneys in the hearing (although the parties may use attorneys to help prepare
their briefs and some DRB’s allow attorneys to attend the hearing but not
participate).
As soon as possible after the conclusion of the hearing, the DRB issues a written
makes a recommendation in writing that clearly describes its reasoning in reaching
its decision. Although desirable, unanimous decisions are not required for a
recommendation. The DRB may be asked to render a recommendation on
entitlement, quantum or both. DRB recommendations are nonbinding and are
intended to be used by the parties to negotiate resolution of the disputed issue. If
negotiations fail the parties are free to turn to whatever dispute mechanism is
outlined in the contract. If this happens, there is an issue as to whether the DRB
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recommendation is admissible arises. There are arguments on both sides of this issue.
However, “[i]t is believed that the substantial risk that a judge, jury or panel of
arbitrators will place great weight on the DRB recommendation deters the losing
party from filing a lawsuit and taking another bite at the apple. DRB Foundation
statistics and anecdotal evidence tend to support that belief.”25
DRB procedures, costs, and related issues should be concisely spelled out in a DRB
clause in the contract documents. A guide specification for a DRB clause is contained
in Practices and Procedures Practices and Procedures: Dispute Review Boards,
Dispute Resolution Boards, Dispute Adjudication Boards published by The Dispute
Resolution Board Foundation.
11-3E.3. DRB Costs
DRB costs include the administrative efforts of selecting the DRB members; the costs
of the DRB members’ time, travel and expenses for the periodic site visits; and the
costs of additional trips and related expenses for DRB hearings beyond those that
might take place during a periodic visit. Board members are most often paid a daily
rate plus expenses for meetings, site visits and dispute hearings and an hourly rate
for document review and study time spent reviewing documents at home,
communications, clerical work, and other nontravel expenses. Other expenses
include the administrative costs of distributing progress reports and documentation
to the DRB members. The contractor and owner share the DRB costs equally
although some DRB clauses require that the contractor pay all costs and include half
of the cost paid in the next monthly payment application submitted to the owner
under the contract.
11-3E.4. DRB Effectiveness and Success
All evidence, both statistical from the DRB Foundation and anecdotal from owners,
contractors and attorneys involved in projects using the DRB process indicates that
this form of ADR is both effective and successful. Some of the reasons given for this
conclusion include the following.
25 Randy Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time”
Resolution and Prevention of Disputes, International Institute for Conflict Prevention & Resolution,
CPR Construction Advisory Committee, Dispute Resolution Board Subcommittee, New York, 2010.
16
11-3E.4.a. Quick resolution of disputes and reduction of unresolved claims.
The mere existence of the DRB tends to foster an environment that encourages the
parties to avoid the pursuit of frivolous disputes, to resolve most disputes at the
project level and only involve the DRB in those few disputes that reach a true
impasse. This is due to several factors:
• Members of the DRB are impartial, technically proficient, project
knowledgeable, well respected and mutually selected. The DRB members are
respected by the parties, which discourages both parties from the possible
loss of credibility associated with presenting minor or nonmeritous claims.
Additionally, while preparing draft submissions to the DRB the parties often
realize that their own claim is weaker than initially thought or the other
party’s position stronger – thus creating an impetus for a negotiated
resolution of the issue, obviating the need for a DRB hearing altogether.
• DRBs help improve the relationship between parties by creating an
atmosphere of communication and trust. Knowing that disputes are going to
be resolved expeditiously and fairly, the parties become more willing to be
openly communicative and work toward a common goal; that is, settling
disputes themselves whenever possible.
• A DRB is simple, straightforward, fair and efficient. The DRB member’s
familiarity with the industry, the particular project, their availability and the
knowledge that the DRB will act quickly and fairly tends to reduce
opportunities for posturing by the parties. Because DRBs typically hear only a
single dispute at a time, the aggregation of claims is reduced.
In sum, the existence of a DRB makes resolution of claims a top priority and reduces
the list of unresolved disputes, allowing the parties to maintain their focus on
construction of the project.
11-3E.4.b. High resolution rate. It is reported that DRBs have nearly a 100%
success rate for resolving construction disputes.
“According to the DRB Foundation, which has a database of over 1200
projects since 1975 that have used DRBs:
17
• 60% of projects with a DRB had no disputes (this statistic
attests to the “dispute prevention” benefit that accompanies any
Standing Neutral process).
• 98% of disputes that have been referred to a DRB for hearing
result in no subsequent litigation or arbitration.
• The worldwide use of DRBs is growing in excess of 15% per
year, and through the end of 2006 it was estimated that over
2000 projects with a total value in excess of $100 billion had used
some form of DRB.
• Dr. Ralph Ellis, a University of Florida civil engineering
professor, has studied the use of DRBs by the Florida
Department of Transportation involving over $10 billion of that
agency’s construction projects. He concluded that use of DRBs
resulted in:
- Net cost growth savings equal to 2.7% of construction
costs; and
- Net time growth savings of 15.1%.
The American Society of Civil Engineers conducted a study of DRBs in
the mid-1990s and found that DRBs heard a total of 225 disputes on 166
projects worth $10.5 billion. They resolved 208 of the 225 disputes and
the only one that actually proceeded to litigation and was eventually
settled.”26
In those instances where a DRB was not able to resolve a dispute, the parties
typically went on to negotiate the disputes themselves. Reiterating the factors above,
this is due to the DRB members’ knowledge and experience with:
1. The construction industry and this type of project;
2. The design and construction issues germane to the project;
2. The interpretation and application of contract documents;
3. The process of dispute resolution; and
4. The specific design and construction for the project.27
26 Randy Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time”
Resolution and Prevention of Disputes, ibid.27 Robert M. Matyas, Construction Dispute Review Board Manual, ibid.
18
Since both parties agreed to the selection of the DRB members and the process in
advance of any dispute, the parties are normally favorably predisposed to DRB
proceedings.
11-3E.4.c. DRB cost-effectiveness. For very large projects, DRBs are extremely
cost effective because:
• The DRB’s existence encourages quick settlement of most changes and
claims, reducing overall administrative costs and the nonproductive
time of maintaining and pursuing open change order lists. In this
regard, it’s considered a money and time saver, as well as a prevention
cost, since it prevents many claims from escalating into disputes.
• The disputes that do end up in front of the DRB cost far less in a DRB
hearing then they would in arbitration, litigation, or board of appeal
hearings.
In Dispute Review Boards and Other Standing Neutrals, a review of case histories
indicates that the total direct costs of DRBs generally range from approximately
0.05% of final construction cost for a relatively dispute free project to approximately
0.25% for “difficult projects” with a number of dispute hearings. The average is
about 0.15% of final construction cost. The percentages cited are from case studies of
projects in the range of $50 million to $100 million. It is noted that on projects with a
value of more than $100 million the percentage goes down and for those projects less
than $50 million the percentage is higher.28
11-3E.5. International Applications
The movement toward DRB use has grown steadily on international projects.
However, some international contracts specify the use of a Dispute Board (“DB”)
which is analogous to the DRB in that DBs also issue recommendations. Other
international contracts require the use of a Dispute Adjudication Board (“DAB”)
which render enforceable determinations subject to the formal dispute process only
at the end of the project. A number of groups have become involved in this
movement to promote the use of a neutral party to resolve disputes, including the
28 Hafer, Dispute Review Boards and Other Standing Neutrals: Achieving “Real Time” Resolution and
Prevention of Disputes, ibid.
19
World Bank and other international development banks, the U.K. Institution of Civil
Engineers, the Engineering Advancement Association of Japan, the International
Chamber of Commerce, the Fédération lnternationale des lngénieurs Conseils, and
the U.N. Commission on International Trade Law.29 Efforts by these organizations
include drafting and promoting DRB clauses for use on international projects. The
DRB Foundation reports that DBs have now been used internationally on projects in
Bangladesh, Botswana, Denmark, Dominican Republic, Ethiopia, Honduras, Hong
Kong, Hungary, India, Ireland, Italy, Lesotho, Madagascar, Mozambique, Pakistan,
Peoples Republic of China, Poland, Romania, Sudan, Uganda, the United Kingdom
and Vietnam.30
11-3E.6. Other Considerations of DRB Procedures
A DRB is still a voluntary, nonbinding method of settling disputes. DRB
specifications should be written to neither interfere nor hinder the parties’
traditional dispute resolution methods in the event a DRB recommendation is not
satisfactory to both parties. For example, time taken for attempted DRB resolution
should not penalize either party in regard to notice provisions of claims, requests for
contracting officer’s decision or requests for an appeal.
The DRB process is compatible with the partnering process, described above. Many
owners have now taken steps to incorporate both partnering and DRBs into the same
projects. Smaller projects that cannot afford full time three member DRBs should
consider a single person DRB or seek the assistance of persons in the local area that
can function as a board without the expense of a travel budget. Other alternatives
include use of a multiproject, multicontract or some sort of standing DRB that may
be set up by sponsoring trade associations.
11-3F. ADJUDICATION
Adjudication is a compulsory dispute resolution mechanism imposed by contract
and applies in the UK construction industry. It is, in the words on one commentator
“...an accelerated and cost effective form of dispute resolution that, unlike other
means of resolving disputes that involve a third party intermediary, results in an
29 Robert M. Matyas et. al, Construction Dispute Review Board Manual, ibid.30 Practices and Procedures: Dispute Review Boards, Dispute Resolution Boards, Dispute
Adjudication Boards, The Dispute Resolution Board Foundation, ibid.
20
outcome that is a decision by a third party, which is binding on the parties in the
dispute.”31 The adjudicator is a third party intermediary appointed to resolve a
dispute between the parties. The decision of the adjudicator is binding and final,
unless it is later reviewed by either an arbitration panel or court, whichever is
mandated by the contract’s Disputes clause. That is, the adjudicator’s decision is
“interim binding” or binding on the parties until the dispute is finally determined by
legal proceedings at the end of the project, arbitration or by agreement.
Adjudication is intended to be a condition precedent to either arbitration or litigation.
Adjudication in the UK is mandated by Section 108 of the Housing Grants,
Construction and Regeneration Act of 1996. As a result, the parties cannot waive the
adjudication requirement by contract. Similar statutes have been adopted in
Australia, Hong Kong, New Zealand, Singapore and South Africa. The standard set
of contracts published by the International Federation of Consulting Engineers32 (the
FIDIC Rainbow Suite), used globally by the World Bank, includes DRBs.
Adjudication has been described as a “pay first, argue later” statutory mechanism
for resolving disputes in the construction industry and is intended to protect cash
flow in construction.33 Adjudication is a 28 day procedure (but may be extended by
agreement of the parties). This has caused another commentator to refer to
adjudication as “rough justice” with the comment – “Given the tight time constraints
adjudication can sometimes be seen to be rough justice as the responding party may
only have a matter of 2 – 3 weeks to prepare a defence to the claim brought against
them.”34
Adjudication is almost never used as an ADR form in the United States. However, it
is included in this chapter because U.S. based contractors working internationally
may find they have a contractual right to adjudicate disputes prior to proceeding to
other dispute resolution procedures.
11-3G. MEDIATION
Mediation is an entirely different form of ADR. It is a private, informal and
c onsensual submission of a dispute to a forum where the parties are assisted by a
31 Marthinus Maritz, Adjudication of Disputes in the Construction Industry, Essays Innovate, No. 3, 2009.32 Federation Internationale De Ingenieurs-Conseils (“FIDIC”).33 Adjudication: A Quick Guide, UK Practical Law Construction, www.practicallaw.com/8-31-7429.34 Cleaver Fulton Rankin, The Benefits of Adjudication in the Construction Industry, April 2010.
21
neutral third party in reaching a voluntary settlement. Mediation is a form of
faci l i tated negotiation into which a third party is inserted. It is a non-binding
form of ADR where the parties to the dispute are in total control of the outcome.
There are two variations of mediation. The most common form of mediation is the
individual mediator. However, a mediation panel may be available at the
request of the parties to the dispute.
Mediation has gained considerable and well deserved popularity in recent years as a
form of ADR. In a typical mediation, the parties jointly select a mediator whose role
it is to assist the parties in reaching a mutually satisfactory resolution of the dispute.
As such, the mediator does not render a decision. Instead, the mediator assists the
parties in assessing their respective risks and finding areas for compromise.
The parties are free to fashion their own mediation rules and in so doing this action
actually represents the first of several agreements leading to the ultimate resolution
of the dispute. The keys to successful mediation are joint commitment to “solving” a
mutual problem as opposed to “beating” the opponent and a willingness to proceed
in a nonadversarial mode with a genuine view toward reaching a compromise.
A typical mediation model involves some or all of the following steps:
1. Advance exchange of written position papers, furnished also to the
mediator;
2. Formal presentations of each party’s facts and arguments in a joint
session, usually without cross-examination, but with an opportunity
for questions by the mediator; and
3. Caucus sessions in which the mediator meets privately with each party
and shuttles between them attempting to find common ground,
assisting in risk assessment and expediting the movement of the
parties toward compromise.
The mediator moving between the parties tries to structure a settlement.
Frequently, mediators offer a n assessment of the positions asserted and
sometimes even offer mediator recommendations. The concept is that the
22
mediator assists the parties in carving out their own resolution rather than
rendering a decision.
The advantages of mediation are that it is inexpensive; requires a small investment
of time; is non-binding; and is both private and confidential. (In fact, most
mediation settlements contain a strict confidentiality clause of non-disclosure
agreement concerning the outcome of the mediation.) Mediation is flexible,
limited only by the willingness and ingenuity of the mediator and the parties.
Generally, mediators focus on common interests. The disadvantage of
mediation is that mediators are trained to “drive a deal” and, as a result,
sometimes are less interested in facts or contract language than they are in
completing a deal. The mediator's job is to push for resolution regardless of the
issues. This may become a real disadvantage when the parties enter into mediation
at the urging of a Court but are on “opposite sides of zero”. That is, if the parties do
not agree on claim entitlement but the mediator is still pushing for settlement,
mediation can be a frustrating and fruitless exercise.
The AAA maintains a panel of qualified mediators, as do several private mediation
services such as the Judicial Arbitration and Mediation Services (“JAMS”) or JAMS-
Endispute, for example. One key to a successful mediation is the selection of a
mediator with both construction and litigation experience; the ability to correctly
and persuasively discuss the strengths and weaknesses in each party’s positions; and
the ability to maintain the parties’ confidence in their objectivity and advice.
Mediation is occasionally mandated by contract, including A1A 201A (1997 Edition),
but is quite frequently entered into voluntarily by the parties after a dispute has been
identified and routine negotiations have failed. It is most likely to be successful
when each party recognizes some responsibility for the problem, when each is
familiar with and wishes to avoid the high cost and time consuming nature of
litigation and when there is a mutual desire to maintain an ongoing business
relationship. By addressing the dispute as a joint business problem requiring
compromise, the parties are frequently able to reach a mutually acceptable
settlement and do so in a manner preserving future commercial dealings.
23
11-3H. MED-ARB / MED THEN ARB / ARB-MED
Another ADR method is a hybrid proceeding, a combined form known as Med-Arb
(mediation-arbitration). This form of ADR has been borrowed from labor relations
where it has been used for some years. The process is initiated with mediation of
the issues. To the extent that issues can be resolved by mediation, they are settled.
Once the parties agree that the remaining issues cannot be resolved by mediation,
those issues are submitted to the arbitration process. By the terms of the original
Med-Arb agreement the parties agree that mediator becomes the arbitrator of the
unresolved issues.
There are two variations of this theme including:
Med-Then-Arb – This hybrid technique is identical to the above except that
two different neutrals are employed. If the mediation fails then the second
neutral is brought in as the arbitrator.
Arb-Med – This is an ADR form in which a neutral arbitrates the dispute,
makes an award and then mediates the dispute while the award remains in
a sealed envelope. If mediation fails, the arbitration decision is unsealed,
presented to the parties and becomes binding. (A separate form of Arb-
Med is discussed below.)
The advantage of this system is that the parties are committed to a continuum of
dispute resolution that will result in full resolution of all issues, in one forum or
another. Further, the mediator becomes fully knowledgeable of the issues in
dispute before becoming the arbitrator. To that extent, it is perceived that this
individual may be a more effective arbitrator.
The most frequently cited disadvantage of the Med-Arb system revolves around
the role, power and neutrality of the mediator/arbitrator. To be an effective
mediator, the mediator needs the complete confidence of the parties during
mediation and must be able to obtain confidential disclosures from each side.
Knowing that the mediator may become the arbitrator, however, the parties may
withhold some information which may inhibit the chances of a successful
mediation. On the other hand, if the mediator gains a substantial amount of
24
confidential knowledge from the parties, this may make it difficult to be a neutral
arbitrator.
11-3I. SHADOW MEDIATION – ARB-MED
This ADR form is a hybrid of the arbitration process. In the Arb-Med
process a mediator is retained to sit through the arbitration hearings as an
observer. At any time during the arbitration if either of the parties wants to mediate
a specific issue and the other party agrees, the arbitration proceeding is
temporarily suspended and the Shadow Mediator, who is familiar with the case
(having attended all arbitration proceedings), assists with mediation of the issue.
The Shadow Mediator is also free to suggest possible avenues of settlement of issues
to the parties during the arbitration proceedings. If the mediation is successful,
the issue is resolved and removed from the arbitration proceeding. If it is
unsuccessful, the issue is returned to the arbitration forum for a determination.
Thus, there are two processes running concurrently, with separate neutrals. If
total agreement can be reached through mediation the arbitration panel may be
dismissed.
The apparent advantage to this system is that it allows parties to remove selected
issues from the arbitration process as the situation becomes clarified during
arbitration and allows them to carve out their own settlement, at least of some
issues. As the size and scope of the disputed issues are reduced the likelihood of
resolving the entire dispute rises. The principal disadvantage of this form of ADR
is one of cost. This ADR form employs two neutrals at all times thus increasing
the cost of ADR.
11-3J. MINITRIAL
A Minitrial is a voluntary, confidential and non-binding procedure. “The
‘Minitrial’ is not really a trial at all. Rather, it is a structured settlement
process in which each side presents a highly abbreviated summary of its
case to senior officials of each party who are authorized to settle the case.”35
Minitrial agreements frequently limit these presentations to a half-day or a single
35 Eldon H. Crowell and Charles Pou Jr., Appealing Government Contract Decisions: Reducing the Cost and
Delay of Procurement Litigation with Alternative Dispute Resolution, Maryland Law Review, Vol. 49, Issue
1, October 15, 2012.
25
day for each side. The Minitrial concept requires that top management
representatives (with authority to settle) participate in the proceeding. The
Minitrial is typically presided over by a jointly selected neutral who advises the
parties, after the presentations are completed, concerning the apparent strengths
and weaknesses of each case. The neutral then assists the top management
representatives to negotiate a settlement at this point, somewhat like a mediator.
The concept is to require top level management to sit through and listen carefully to
both their own best case as well as that of the other side, and to reach a management
decision that is based upon a realistic appraisal of both positions.
The procedure is designed to put the decision makers in the position of judges
concerning the dispute rather than combatants. As with all forms of ADR, the parties
are free to fashion their own rules and variations on the basic format. As with
conventional mediation, the parties remain in control of the situation and have not
surrendered decision making to a third party.
The advantages of this system are the relatively low cost (compared to litigation or
arbitration) and the fact that each party gets to present their entire case as if in
court or in arbitration. Additionally the neutral advises and assists top
management of both parties in finding ways to resolve the dispute rather than
rendering a decision. Non-binding results, privacy, party participation and control
over the process are also considered advantages of this ADR form.
The biggest disadvantage of the Minitrial system arises if the top management
personnel were personally involved in the issues in dispute. This may render them
unsuitable as panel members. Other disadvantages arise if the issues in dispute
involve legal matters or matters of credibility as management personnel may not be
trained to or capable of handling such issues. Finally, this system may not be cost
effective if the matter in dispute is not very costly.
A variation of the Minitrial, discussed above, is to empanel a similar mock jury in
the Minitrial process to assist the neutral and top management participants in
understanding how a potential jury will react to the arguments presented and
positions asserted.
26
11-3K. SUMMARY JURY TRIAL
A Summary Jury Trial is similar to the Minitrial in many respects. The concept is
that the attorneys for both parties are each given one or two hours to
summarize their case before a "rented" jury of six or more people. Introduction
of evidence is obviously limited due to the time limitation and witnesses and
experts are not allowed to participate in the proceeding. As a result, legal counsel
for each side are essentially limited to their opening arguments.
The neutral advisor may be either a sitting judge from a local Court or may be a
retired judge familiar with construction issues retained to preside over the
Summary Jury Trial. After the case summaries have been presented, the judge
provides a short explanation of the law concerning the issues in dispute and the
jury retires to the jury room. The jury tries to reach a consensus opinion on the
case. Failing that, individual juror views are presented anonymously. Generally,
Summary Jury Trial verdicts are advisory and non-binding (but may be binding,
made so by agreement of the parties). The concept is for the parties to gain an
understanding of how a potential jury will react to the case before going to trial.
The advantages of the system are that the cost is relatively low compared to actual
litigation and the time needed to present the case is minimal. Another significant
advantage is that when each of the parties has to summarize their case into a
precise one or two hour presentation, both sides are forced to focus on real issues
and forego legal theatrics. The single most commonly cited disadvantage is that the
jury has to form an opinion based solely on a very short presentation from each
side, a timeframe that is short in the extreme, given the complexity of the typical
construction case.
11-3L. PRIVATE JUDGE
In some construction disputes, there are issues of law which must be decided in
order to reach resolution of the dispute. Generally, issues of law ought to be
decided by judges as they are skilled and experienced in deciding legal issues. But
litigation need not result. One form of ADR that allows input from judges but
avoids the need for litigation is the Private Judge concept. The concept is to retain
the services of a retired judge who is experienced with construction litigation. The
private judge will typically conduct the process in a formal manner resembling the
27
litigation process, but without the need to await an available courtroom and time
on the Court’s docket. The private judge will generally render decisions which
may be either advisory or determinative of the issue, depending upon the terms of
the agreement between the parties.
The advantages of this form of ADR are that retired judges practicing this type
of ADR are most often skilled in managing complex construction cases and
making decisions. The cost of this form of ADR is typically lower than many
other forms and certainly a great deal less than litigation, generally being split
between the two parties to the dispute. Finally, the speed with which a hearing can
be established and held is considerably faster than litigation. The primary
disadvantage cited by most is that the underlying process remains the same
regardless of the fact that the trier of fact is a retired judge. That is, if a private
judge is used in a trial, in arbitration, or in mediation, due to their background and
experience, any process overseen by a private judge will likely to be run like a
formal trial.
11-3M. ARBITRATION
Arbitration in construction is not new, having arisen in the 1880's under the earliest
forms of the American Institute of Architects (AlA) contract document. 36
Arbitration is a consensual process based upon agreement between the parties.
Arbitration panels are generally three person panels selected by agreement of the
parties either on their own or through the auspices of an organization such as the
American Arbitration Association (“AAA”). Arbitration is always focused on a
single project and generally concerned only with those disputed issues not
resolved between the parties at the site level.
Originally, arbitration was considered to be faster and less expensive
than litigation. It was also generally considered to be an informal
process, dispensing with the rules of evidence, prehearing motions and most of
the discovery process all of which are inherent to litigation. Thus, it was
potential ly flexible to fit the circumstances of the project. Once the
determination of the panel is issued upon completion of the hearing, the arbitration
award is typically enforceable in court.
36 See American Institute of Architects, Uniform Contract, Articles II and V, 1888 and Form 19642-PL,
Uniform Contract, Article XIII, 1905.
28
Because of the high cost of formal dispute resolution through litigation in State and
Federal Courts, arbitration remains a popular form of ADR in nonfederal
construction contracts for several decades. The AAA has promulgated a special set
of arbitration procedural rules and maintains a nationwide panel of potential
arbitrators. In response to criticism that arbitration of construction disputes has not
always proven to be as quick and economical as originally intended, the AAA
revamped their rules in 1995 to allow for expedited hearings on small disputes,
special rules and special panels for complex claims, etc.37 and again in 200938.
Three “tracks” of procedures based on the size of the claim are now available: the
regular track (dealing with disputes in the range of $75,000 to $1,000,000); the fast
track (pertaining to disputes less than $75,000); and the large, complex track
(applicable to claims of at least $1,000,000).
The fast track system is intended to resolve smaller claims within 60 days and
includes accelerated procedures for appointing arbitrators and holding preliminary
conferences. New claims and counterclaims are not permitted, discovery is virtually
eliminated and claims of less than $10,000 are resolved without a hearing by the
arbitrators’ review of documents. Hearings of one day are permitted for claims
exceeding $10,000 and awards must be issued within fourteen days after the
completion of the hearing. Fast track arbitrators are compensated on a per case rate,
and nonrefundable filing fees range from $775 to $975 for the initial filing fee and
$200 to $300 for the final fee.39
Under the current regular track system for midsize claims (defined as claims
between $75,000 and $1,000,000), arbitrators are given expanded authority to
manage the arbitration process to expedite resolution of the dispute. Arbitrators
have the authority to direct the discovery process, permit new claims and
counterclaims, hold preliminary conferences, consider preliminary motions and
rulings, and request or reject certain offers of proof. In addition to monetary awards,
arbitrators have the authority to grant equitable relief such as specific performance,
reformation or recission and they have limited authority to make modifications
37 American Arbitration Association, Construction ADR Task Force Report, New York, October 26,
1995.38 Construction Arbitration Rules and Mediation Procedures – Rules Amended and Effective October
1, 2009, American Arbitration Association, New York.39 All filing fees cited in this chapter are from the Fee Schedule Amended and Effective June 1, 2010,
Construction Arbitration Rules & Mediation Procedures, American Arbitration Association, New
York, October 1, 2009.
29
where an award contains technical or clerical errors. Initial filing fees for regular
track cases range from $1,850 to $6,200 with a final fee ranging from $750 to $2500.
The large, complex track system is mandatory for claims in excess of $1 million and
allows the parties the option to choose either one or three arbitrators. Where the
parties agree to conduct a preliminary hearing, the rules set forth a detailed list of
issues to be considered: including statements of claims and issues; stipulations as to
uncontested facts; the extent of discovery and document exchange; witness
identification; hearing schedules; stenographic recording of the proceedings; and the
use of other dispute resolution techniques. The complex track rules permit the
arbitrators to limit the discovery process and generally control the proceedings in
order to expedite a speedy resolution of the dispute, and in certain circumstances, to
assign attorney’s fees as part of the award. The nonrefundable initial filing fee for
complex track cases up to $10 million range from $8,200 to $12,800 with a final fee
ranging from $3,250 to $4,000. For claims exceeding $10 million the initial filing fee
is $12,800 plus 0.01% of the amount above $10 million with the fee capped at $65,000
and the final fee of $6,000.
The AAA is also in the process of revising rules under all three tracks relating to the
qualifications of arbitrators. Planned changes include requirements that potential
arbitrators have a minimum of 10 years experience, be approved by regional
construction advisory committees, and undergo mandatory training for initial
qualification and retraining every three years.
The most commonly cited advantage of arbitration over formal litigation is the use
of arbitrators with knowledge of the construction industry. Additionally, since an
arbitration proceeding is devoted to a single case, it has been commonly
thought of as being quicker than litigation in that the hearings do not have to
compete for courtroom space and the Court’s attention to other ongoing matters.
Both the hearings and the decision are private matters, thus there is little publicity
concerning the proceedings or the outcome. Arbitration panels are also allowed
to grant any remedy or relief that is "equitable". And, the decision of the arbitration
panel is most often final and conclusive of the matter. The key distinction between
arbitration and mediation is that the arbitrators make a decision and issue an award
concerning the dispute that has the same force and effect as a judgment entered by a
court.
30
Arbitration is not without its potential disadvantages. Arbitration panels may or
may not explain the basis of their decisions unless the arbitration rules require it.
Thus, the parties may have little understanding of why a decision is reached. The
ability of the losing party to appeal a decision is severely restricted. Since the
arbitration decision is almost always final and enforceable at law, the expense
of preparing for arbitration is almost the same as preparing for litigation. As some
have commented, "Arbitration is the only real crapshoot in construction disputes --
everything else can be appealed!"
Over the past two decades arbitration has become much more formal and legalistic,
frequently allowing as much pre-trial discovery as any court case. It is not
uncommon today that the most cost intensive aspects of litigation – extensive
document discovery and production, multiple depositions, unlimited motions
practice – are now routine aspects of many, if not most, arbitration proceedings.
Some practitioners complain that arbitration panels frequently do a poor job of
limiting discovery and controlling the associated costs of the process. Many
involved in the arbitration process hold to the notion that arbitrators tend to issue
“compromise” awards (“split the baby” is a phrase heard bandied about frequently
with respect to arbitration). As a result, some parties have used Baseball Arbitration
an ADR form in which the arbitrator is required to issue a “winner take all” award
selecting the entire claim position of one party or the other (discussed further below).
As a result, today there is general agreement in the construction industry today that
arbitration is no longer faster or less expensive than litigation. In one major study of
issues related to arbitration, 65% of in-house legal counsel respondents concluded
that arbitration is more expensive than litigation and another 23% opined that
arbitration costs about the same at litigation. Only 13% of the survey respondents
thought arbitration less expensive than litigation. 40 Another study concerning
arbitration concluded that the “average arbitration” took from 17 to 20 months. It is
believed, however, that this timeframe only included the period from the start of the
hearings to the issuance of the award and made no attempt to estimate the duration
of the discovery and other pre-hearing time. 41 Finally, a third study of the
effectiveness of arbitration concluded that 12% of the respondents blamed delays to
40 International Arbitration: Corporate Attitudes and Practices, Queen Mary University of London School
of International Arbitration and PriceWaterhouse Coopers, London, 2006.41 Frederick Gillion, Trends in ICC Arbitration: Construction and Engineering Disputes,
http://construction.practicallaw.com, July 30, 2012.
31
the arbitration process on arbitration panels being “overly flexible” or a “failure to
control the process”; another 11% claimed that the “arbitrators caused delays”; and
another 8% blamed the delay on “tardiness in rendering the award”.42
One alternative related to arbitration, intended to save both time and cost, is the use
of a Single Arbitrator rather than a three person panel. The arbitrator must,
therefore, act solely as a neutral. The cited advantage is that the cost of arbitration
is substantially decreased and it is easier to schedule hearings since the parties
only have to coordinate their schedules with a single arbitrator.
The disadvantages discussed above remain fundamentally the same. There is,
however, an added disadvantage. If one arbitrator on a three person panel
becomes confused or sidetracked on a particular issue, it is likely that the other two
arbitrators can straighten the situation out. With a single arbitrator, there is no built
in check and balance system and the risk of a bad decision due to confusion or
inexperience with a particular issue increases dramatically.
The AAA continues to address the most frequent criticisms of the system. On
October 1, 2013 the AAA made a number of changes to their rules. Four of the major
changes are highlighted below:
Mandatory mediation has been added to the arbitration rules. The new rule
requires that all cases with claims in excess of $75,000 conduct a mediation at
some point during the arbitration process. It is noted, however, that this rule
does allow one or both parties to unilaterally opt out of the mediation. The
AAA believes that incorporation of mediation into the arbitration process
may help resolve disputes earlier and at less cost.
Under these new rules arbitrators have been granted more authority to
manage the process. The additional authority includes: (a) holding a
preliminary hearing soon after appointment of the tribunal and providing a
checklist of discussion points at this initial hearing; (b) providing arbitrators
the ability to control the scope of discovery; (c) allowing the tribunal allocate
the cost of document production between the parties; and (d) providing the
42 2010 International Arbitration Survey: Choices in International Arbitration, Queen Mary University of
London School of International Arbitration and White & Case, London, 2010.
32
tribunal with the authority to order sanctions for abusive or objectionable
behavior.
The new rules specifically grant the tribunal the authority to issue rulings on
dispositive motions if the moving party can make a showing that the motion
is likely to succeed and the motion, if granted, will dispose of or narrow the
issues in the case. The AAA believes this will help eliminate claims with no
merit and reveal factual information concerning the remaining claims.
The new rules also provide for “emergency relief”. A party may seek
emergency relief prior to the appointment of the tribunal by notifying the
AAA and other party of the type of relief sought and reasons why the relief is
required on an emergency basis. The AAA will then appoint a single,
emergency arbitrator within one business day. The emergency arbitrator
must them establish a schedule to consider the relief sought within two
working days.
11-3N. ADVISORY ARBITRATION / FACT FINDING
The general discussion of arbitration above remains the same for this form of ADR
with the exception of the fact that the determination of the panel is not final. It is
advisory only. The AAA refers to this process as Fact Finding that involves
utilization of a neutral (an impartial third party) who reviews the disputed issue
and issues findings or conclusions with or without a recommended settlement.43
The advantages set forth above also remain the same except, again, the decision is
not final.
The disadvantages change due to the fact that the decision is advisory. The
apparent disadvantage is that one can go through the entire arbitration process,
receive an advisory opinion, and have the losing party refuse to accept the
opinion.
11-30. BASEBALL ARBITRATION
This is a unique form of arbitration borrowed directly from the professional sports
world. In this form of ADR a single, neutral arbitrator is retained. Both parties
43 Ibid, The Construction Industry’s Guide to Dispute Avoidance and Resolution.
33
present their strongest case, along with the proposed monetary outcome that
they believe is supported by the facts and the law. The arbitrator must then choose
one of the two outcomes proposed by the parties. The arbitrator cannot carve
out an equitable determination but is required to select one position or the other.
The intended advantage is that the parties will be more realistic in their
demands as they understand that the arbitrator is required to select one position
or the other and the parties will be bound by that selection.
The disadvantage lays in the fact that arbitrator can only select one position or the
other. Thus, the arbitrator is unable to carve out a compromise position.
Compromise in this form of ADR, to the extent is exists at all, lays with the two
parties keeping their own positions as reasonable as possible.
11-3P. ALTERNATIVE DISPUTE RESOLUTION BEFORE THE BOARDS
OF CONTRACT APPEALS AND THE U.S. COURT OF FEDERAL
CLAIMS
If the contractor is performing work under a direct Federal contract subject to the
Contract Disputes Act then its choices are limited once a contracting officer denies a
claim. The contractor may appeal such a denial either to the Armed Services Board
of Contract Appeals (“ASBCA”) or the Civilian Board of Contract Appeals (“CBCA”)
(depending upon which government agency issued the contract) or to the U.S. Court
of Federal Claims (“CFC”). Given the current state of ADR both the Boards of
Contract Appeals and the CFC now support and participate in ADR activities. ADR
in both forums is strictly voluntary and is employed only if both the contractor and
the government agree to use ADR.
The Boards of Contract Appeals actively participate in ADR, going so far as to have
Board judges directly engage in the ADR procedure. The ASBCA supports the use of
settlement judges, minitrials and summary trials with binding decisions; whereas
the CBCA rules allow for facilitative mediation, evaluative mediation, minitrials,
non-binding advisory opinions and summary binding decisions.
The CFC is not as directly engaged in ADR as the Boards. However, when the
parties advise the judge of their decision to use ADR, the CFC judge may arrange for
a settlement judge or refer the case to a third party neutral. The Rules of the Court of
34
Federal Claims clearly support the use of mediation, minitrials, early neutral
evaluation and non-binding arbitration.
Finally, both the CFC and the Boards have procedures in place to shield the
information gathered in the ADR process from the trial judge should ADR fail and
the case return to litigation.
11.4 ALERNATIVES DURING LITIGATION
Despite the best effort of one or both parties, some issues may not reach resolution
through ADR and must be resolved through litigation. Contrary to popular belief
ADR does not necessarily stop when litigation commences. There are a number of
forms of ADR available for use during litigation as outlined below.
11-4A. VOLUNTARY SETTLEMENT CONFERENCE
A Voluntary Settlement Conference is probably the quickest and least expensive
means of resolving a case when both sides agree that it is to their advantage to
compromise but want to do so in the context of a legal forum rather than direct
negotiations. In this form of ADR, both sides meet to attempt to reach a settlement
with a sitting judge or magistrate acting as a neutral negotiation facilitator. The
negotiation and the settlement take place under the guidance of a judge. The
judge is able to offer suggestions for settlement as well as opinions on various
legal issues that may arise during such discussions.
The advantages often cited for this form of ADR include the ability to schedule the
Voluntary Settlement Conference with a judge of the parties' choice and the
quickness of scheduling and holding the conference(s). Also cited as an
advantage is the fact that discovery need not be complete in order to hold the
conference. Although there are relatively few identifiable disadvantages to this
form of ADR, some practitioners have expressed concern about the ability to have
an open and candid settlement dialogue in the presence of a magistrate or judge
who may, whether properly or improperly, communicate with the trial judge
about the statements and offers made during the settlement conference.
35
11-4B. SPECIAL MASTER / SETTLEMENT JUDGE
The Special Master form of ADR (sometimes referred to as a Settlement Judge) has
been called "ADR's last clear chance before trial". 44 The concept of a Special
Master is for the court to appoint someone with authority and availability to
control the discovery process (such as deciding objections to deposition questions,
document disputes and claims of privilege); to rule on all pretrial matters in lieu of a
judge; and to facilitate settlement discussions. Special Masters may be requested
by either or both parties or may be imposed unilaterally by a Court. Payment is
typically split between the disputants. By putting the litigation into a controlled
framework, the Special Master is often able to help the parties reach a settlement
prior to the trial.
The advantage of the Special Master system is that it can save a great deal of t i m e
a n d cost during the pretrial period with respect to needless discovery battles and
help facilitate settlement discussions. The perceived disadvantages of this system
are that a Court may grant too much authority to the Special Master (for example,
Summary Judgment Motions). Some also fear the possibility of private
discussions between the Special Master and the trial judge concerning the details of
settlement negotiations or positions asserted by the parties
11-4C. COURT APPOINTED EXPERTS
If the parties agree that certain issues in dispute require expert testimony and can
agree to share the cost of such experts, then Court rules in most States allow
appointment of the experts by the court. Typically, once agreement on which
issues need expert testimony is reached, each side nominates two or three experts
to the judge and the judge selects one per issue. The expert then works for the
court and is charged with the task of providing neutral, expert witness reports and
testimony.
The advantage is, in the first instance, a substantially lower cost for both parties.
The other apparent advantage to this system is the fact that time is saved during
litigation and the parties avoid conflicting expert reports and testimony which
have to be sorted out by judges and juries. The only apparent disadvantage is that
44 Alan E. Harris, C.M. Sink and R.W. Wulff, Editors, ADR: A Practical Guide to Resolve Construction
disputes – Alternative Dispute Resolution in the Construction field, American Arbitration Association,
Kendall/Hunt Publishing Company, Dubuque, Iowa, 1994.
36
if the wrong expert is selected by the judge, then the expert's reports and testimony
may be given far greater weight than they deserve. Thus, the parties and the judge
must be very cautious in whom they nominate and select.
11-4.D JUDGE PRO TEM
A Judge Pro Tem (or temporary judge) is authorized in a number of States. The
concept is for the parties to stipulate to the Court that they will accept appointment
of a temporary judge, who is normally named by the parties in the stipulation. The
Court then appoints the temporary judge, who must be an attorney and who
becomes the trial judge for the case. The temporary judge has all the powers of a
sitting judge and runs the case in the same manner and fashion as any other
litigation. The temporary judge simply acts in lieu of a permanent judge with all
other aspects of litigation remaining the same. Finally, the Judge Pro Tem
maintains jurisdiction over the case until a final determination is reached and can
hear and determine all post trial motions.
The advantage is that a case goes to trial much faster through use of a Judge Pro Tem
since the only case on the judge's docket is the case between the parties. The
disadvantage, at least in some States, is that by stipulating to accept a Judge Pro
Tem, the parties have given up their rights to a jury trial.
11-5. TRIAL BY REFERENCE (REFEREE)
Trial by reference before a Referee, who need not be a judge or attorney, has long
been accepted in both common law and statute. A Referee is a neutral appointed
by the Court, at the request of the parties. The Court order appointing the Referee
sets forth the Referee's authority. Unless otherwise specified in an agreement
between the parties, the Referee will conduct themselves in accordance with
formal rules of procedure. There are two commonly accepted forms of trial by
reference as follows.
General Reference – Under this form of ADR the Referee submits findings of
fact and conclusions of law to the Court. The Referee's report is binding on
the Court and the Court issues judgment based upon the report.
37
Special Reference – In this form of ADR, the Referee's authority is
limited to particular issues as outlined in the Order of Reference. More
significantly, the Referee's report contains findings and recommendations,
which are made to the Court in an advisory fashion. The Court is free to
issue its own judgment.
In both cases, the cost of the Referee is typically allocated between the parties. The
advantages of such a system are speed of trial, ease of scheduling the hearings,
and privacy of the proceedings. Others cite the ability of the parties to select a
Referee who has expertise in the types of issues in dispute, the flexibility of
procedures, and the ability to appeal decisions or recommendations. The
disadvantage most commonly cited concerning trial by reference is that the parties
have to pay their own costs of trial preparation and pay the costs of the Referee.
Further, the Referee's decision lacks finality as it can be appealed.
11-10. ALTERNATIVE DISPUTE RESOLUTION ACT AND THE
FEDERAL ADR EXPERIENCE
Federal agencies have embraced mediation and other ADR techniques in recent
years with very positive results. The Administrative Dispute Resolution Act of 1996
(“ADRA”) 45 encourages voluntary use of ADR techniques in Federal contract
disputes. The Federal Acquisition Regulations (“FAR”) now contain implementing
regulations encouraging agencies to use ADR to the “maximum extent practicable.”46
The ASBCA and CBCA have adopted rules permitting and facilitating ADR
procedures prior to formal administrative proceedings.
ADR is being used with increasing frequency and success as a method of resolving
disputes with the Federal government. In an October 1996 survey conducted by
Judge Martin J. Harty of the ASBCA47, the Boards collectively received ADR requests
covering 169 appeals in Fiscal Year 1996. Binding ADR (Summary Trials) and
nonbinding ADR (Settlement Judges and Mini Trials) have been the methods
typically used. The ASBCA’s experience with the 42 ADR requests it received is that
nine out of 10 ADR proceedings result in an agreement that resolves the dispute.48
45 P.L. 104-320, 110 Stats. 3870 (October 19, 1996).46 FAR §33.204.47 Federal Contract Reports, Vol. 66, November 15, 1996, 525 – 530.48 Report of Transactions and Proceedings of the Armed Services Board of Contract Appeals for the
Fiscal Year Ending September 30, 1996.
38
This report identified cases particularly suitable for ADR are the following:
1. Small dollar cases, particularly where litigation costs would seriously
erode any award;
2. Non-complex cases with relatively clear cut factual or legal issues;
3. Cases where only quantum is in dispute;
4. Large, factually complex claims where both parties recognize some
liability.49
11-11. FORMAL ADMINISTRATIVE AND JUDICIAL DISPUTE
RESOLUTION
The least desirable method of dispute resolution is generally litigation or
administrative proceedings on Federal (and some State) contracts. It is the time
consuming nature, the attendant expenses and the adversarial nature of these
approaches that have fostered the tremendous support in recent years for the ADR
techniques discussed above.
11-11a. Federal Contracts
The initial steps of pursuing a claim into formal dispute resolution on federal
construction contracts were discussed in Chapter 2. The strict certification rules,
unforgiving time limits and procedural technicalities involved in appealing a
contracting officer’s final decision on a claim require extremely careful attention by
the contractor. A detailed examination of such legal matters is beyond the scope of
this chapter and contractors proceeding with claims beyond the contracting officer’s
level are well advised to seek legal advice from qualified attorneys.
A few of the major pitfalls and a general outline of the process are as follows:
Contractors who chose to appeal an adverse decision to a Board of Contract
Appeals must do so within 90 days of receipt of the contracting officer’s final
determination or lose their right of appeal to a Board. Contractors who opt to
appeal to the Court of Federal Claims must do so within 1 year of receipt of
the final decision. Neither the Boards nor the court of Federal Claims have
the authority to waive these filing deadlines.
49 Ibid. See Note 16, p. 527.
39
As noted in Chapter 2, a failure to certify a claim in excess of $100,000 will
result in a dismissal of an appeal. Mere errors in the required certification
language can be corrected without penalty prior to the issuance of a final
judgment by a Board or Court. Further, the contracting officer is required to
advise the contractor of any alleged defects in certification within 60 days of
receipt of the claim.
These time limits are strictly enforced and contractors must not wait until the
eleventh hour to take the necessary steps. Appeals to the Boards are commenced by
filing a short notice of appeal with the appropriate Board, with a copy furnished to
the contracting officer. Proceedings at the U.S. Court of Federal Claims begin more
formally with the filing of a detailed complaint.
Several Federal statutes, including the Contract Disputes Act and the False Claims
Act, impose a variety of penalties on contractors submitting groundless or
fraudulent claims.50 Penalties include fines, imprisonment, claim forfeiture, contract
forfeiture and reimbursement of the government’s costs of investigation. 51
Accordingly, contractors are strongly advised to avoid making any false
representations concerning claims and to carefully examine all claims for accuracy
and adequate support.
11-11b. Private Contracts and State and Local Public Contracts
Absent contract provisions or a subsequent agreement to proceed with some form of
ADR, resolution of disputes on private contracts and public contracts at the State or
local level will frequently require litigation before State or Federal Courts. As with
Federal contract formal dispute resolution, these proceedings involve compliance
with various statutes and rules requiring advice of counsel.
States also impose statutes of limitations for lawsuits involving written contracts.
Under these legislated limitation requirements, lawsuits must be filed within a
specified timeframe — which varies from State to State—after the “cause of action
50 E.g., 18 U.S.C. §287, 18 U.S.C. §1001 and 41 U.S.C. §604.51 See, for example, Daewoo Engineering and Construction Co., Ltd. v. United States, 73 Fed. Cl. 547 (2006)
where the contractor filed an appeal to the U.S. Court of Federal Claims in the amount of $63.9
million on an $88.6 million contract. After a 13 week trial Daewoo ended up owing the government
$50,629,856 plus False Claims Act costs of $10,000 for each violation which was still subject to
accounting at the time the Court issued the initial decision.
40
accrues.” This is generally, but not always, marked from the date the contractor
knew or should have known of the basis for the claim.
11-11c. Mechanics’ Liens
On private contracts, contractors typically have an alternative or parallel remedy in
the form of mechanics’ liens filed and perfected in strict accordance with the State’s
statutory scheme for such liens. In some States it is necessary to file a notice of lien
before the work is commenced. Further, under most State mechanics’ lien statutes,
the time periods for filing and perfecting such liens are extremely short and are
strictly enforced. Again, the assistance of an attorney and at least a general
familiarity with the lien laws in the State where the construction contract is being
performed is critical.
11-12. CONCLUSION
Disputes that cannot be resolved often result in a tremendous amount of ongoing
nonproductive downtime for all parties to the contract. Pursuing or defending
claims and disputes is costly, time consuming, detrimental to project relationships
and generally adds no value to the constructed project. ADR procedures, on the
other hand, provide viable alternatives to costly litigation and help projects get back
on track quickly and productively. As noted at the outset of this chapter, the
construction industry is at the forefront of finding ways to resolve disputes
without resort to litigation. While nearly thirty forms of ADR (and a number of
variations) have been identified in this chapter, the authors are confident other
forms of ADR exist. Further, it has become clear that the forms of ADR are truly
only limited by the skill, imagination and desire to settle disputes on the part of
the parties to the dispute.